Friday, March 6, 2009

How Low Could It Go?

Fascinated by the similarities bet. the Dow crash of '29 and the Nasdaq crash of '00, I decided to look into it a little further. Here's the poop.

The Dow peaked in August, 1929. From there it fell 87%, bottoming in July 1932. "The entire gains of the Roaring Twenties boom and more were wiped out in just three years," writes Harry S. Dent, Jr (p. 274). Interestingly, by July 1933, just one year off the low, the Dow rallied 300%! From there it faded 50% to hit another low (tho not as low as 1932) in 1942. From this second low, it took 12 years to regain the 1929 high. So $10,000 invested in the Dow in August 1929 wouldn't be worth $10,000 again until November 1954, 25 years later.

The interesting thing, the thing that caught my eye, anyway, is that the Nasdaq fell by almost an identical amount, 84%, when that bubble popped in 2000. It peaked at 5132 on March 10, '00 and bottomed at 807 on March 3, '03. From that '03 low the Nasdaq rose 350% to 2810 in November 2007. Today it's trading around 1280, roughly 55% off the '07 high and 75% off the '00 high.

So the question is, if the Dow dropped 87% from it's '29 high and the Nasdaq dropped 84% from it's '00 high, will history repeat itself with this latest carnage? The Wilshire total market index hit it's high October 11, '07 at 15,819. If it drops 85% and takes three years to do it, as the markets did with these other two bubbles, it will bottom around 2375 sometime in the fall of 2010.

Today, the Wilshire sits at right around 6900. So if history repeats itself with an 85% drop off the '07 high, we are going to drop 65% more from where we are right now. In that case, $10,000 invested at the peak will be worth $1500 and $10,000 invested today will be worth $4500. Ouch. What's worse, the $10,000 invested in 2007 won't be worth $10,000 again until the year 2032.

So much for riding it out. So much for buy and hold.

A couple things. Heading into these bubbles, the Wilshire chart does not look as parabolic as the Dow (see chart above) and the Nasdaq charts do. So maybe the market will not crater as strongly as it did after '29 and '00.

Who knows? The major indexes are all off around 50% from their '07 highs. Maybe doubling the national debt, slashing interest rates to zero, nationalizing Freddy and Fannie and AIG, and legalizing mortgage cram-downs will do the trick. Maybe not.

On the one hand, those who don't read history are doomed to repeat it--whether as an investor or as a legislator or chief executive.

On the other hand, history repeats itself until it doesn't. Maybe this will be different.

Click on the chart above to enlarge. I found it here along with a very good article by Eric Parnell at Seeking Alpha.

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